Financial Biases
I'm here to talk to you today about how biases keep many of us from making the best financial decisions for our families.
No matter how financially literate you are, you’re still subject to biases and unchecked assumptions in your day-to-day financial decisions. And when you’re operating with an unchecked bias, you aren’t able to evaluate an investment or a strategy with a clear mind.
In our experience, there are three major financial biases that have the highest potential to sabotage your family’s financial success.
First there’s Endowment Bias, which is when you’re unable to make an objective financial decision because of an emotional tie to an asset. It is when the connection it provides is more important than the simple appreciation or depreciation of the asset – for example: the family farm, the house you grew up in, or the stock your grandmother always held.
To make these emotionally loaded decisions a little easier, we recommend that you recognize that the original meaning of this property came about during a different time. When your family member first acquired the asset, they were doing what was best for the family at that time. Take that same spirit – of doing what’s best for your family – and use that as motivation for dealing with the asset in the here and now.
Next is the Status Quo bias, which simply states that you’re likely to keep doing what you always do. Rather than make healthy, needed changes in your financial situation, you keep operating just as you have in the past. Sometimes, people fear that they’ll make a mistake if they make a decision - but not making a decision can itself do you more harm than good.
Try to consider what may be at the root of your Status Quo Bias. Is it because of fear? Because you’re too busy? A reluctance to deal with an emotional topic? Knowing the root of the problem can help you build stragegies to deal with it. It also helps to have a well-defined process and the right team in place that can provide the experitse and experinece to help you make informed decisions.
Finally, there’s the Self-Control bias, which is where your decisions are controlled more by impulse than by discipline or deliberation. Self-Control bias can be an Achilles’ heel for children who have grown up wealthy and are used to living a luxurious lifestyle.
We fully endorse living a life you enjoy, but we also endorse having enough to sustain your family’s needs in future generations. That means living with a measure of self-control.
By being aware of these biases and potecting yourself against them, you’ll help safeguard your family’s finances, now and into the future.
If any of these biases are getting in the way of your financial goals, please reach out so we can see how we may help.